you develop your plan (which is a great way to supplement your own areas of expertise), be sure you spend the time necessary to work closely with the planner on their section because it is your business and the plan must be a reflection of you.
If you are preparing your plan for a franchise startup, pay close attention to the manuals, materials and operating procedures provided to you by the franchisor. Read everything carefully before you begin to write your plan. This information is the starting point of your plan and much of it may be able to be incorporated directly into your plan. Take advantage of the experience of those who have traveled this path before you. And be careful that your plan is not so far removed from the franchisor’s operations that your franchise becomes incompatible with the chain from which it came. Franchisors have strict guidelines they expect each franchisee to follow. We all know what happens to the nail that sticks out above the rest.
That said, business plans are beneficial to a number of businesses and activities that one wouldn’t normally associate with needing a plan. Like the franchisee that has a set program to follow, certain real estate investors know exactly what they need to do to maximize a property’s value. And yet, as we’ll learn later on, a business plan is useful in many such situations. Similarly, existing businesses may be surprised by where a plan may lead…
Pat
Pat was the proud owner of a successful plumbing business. He had put the last several years into growing the business. It was now positioned to go to the next level and seek out large government and public works projects. Pat knew writing business plans wasn’t one of his key strengths. He liked the idea of an independent advisor bringing new thoughts and ideas to his business. So Pat hired a consulting firm to help him “invent the future” and they worked together closely to create a six-year plan for his business.
The plan and the process of creating it were eye openers for Pat. Through the process suggestions were made on how to streamline inventory controls and save money using vendor discounts for prompt payment. While this was basic information it was never taught in school and his friendly competitors, naturally, never revealed such strategies. The biggest weakness and opportunity uncovered was that Pat’s company needed to increase their bonding limit so that it could pursue higher dollar projects. Although each state was different, Pat knew that his state’s contractor’s licensing division required a bond be posted for a maximum dollar amount of work to be done. So, for example, a $100,000 bond allowed Pat’s company to bid jobs up to $1 million. The bond was issued by a surety or bank or insurance company and cost Pat $10,000, or 10% of the $100,000 face value per year. The plan suggested the bonding limit be increased to $1 million. Pat was in a growing area and large public works projects were headed his way. The plan suggested that a higher bonding would allow Pat to partake in such projects.
The plan contained great information for Pat. He immediately went to his bank to see how the increased bonding could be financed. His banker indicated they would consider Pat’s request if he had a business plan that outlined exactly how the increased bonding would be utilized to generate greater cash flow for his company. Pat was quite pleased to hand his banker just such a document. Pat’s banker was impressed. The plan involved innovations and useful strategies. The bonding was increased shortly thereafter and Pat’s company moved up to the next level of business.
Pat learned that a business plan can have immediate benefits for existing business owners looking to expand to a new level. Whether you are a new company or have been around for 200 years, it is never too late, as Pat learned, in the business cycle to obtain and utilize fresh ideas and new approaches.
As our case illustrates, there are many strategic reasons for why a business plan makes sense. You might want a plan to take to potential investors and/or lenders in order to expand or rejuvenate your business. Or maybe you sense flaws in your organization – you’re not sure of your long-term goals, pricing is based on your mood, management styles change with every personnel change and the like. Small problems and even smaller poor choices can add up fast. Don’t wait for all the little problems to begin spiraling into a vortex that can take your business straight down the tubes.
Using your Plan
First, you need a business plan to get to know your business and to create the path that will describe how you will get from where you are to where you want to be. Sure, you might be able to find success without a plan. You might be able to get from Pismo Beach to Cape Hatteras without a map, but wouldn’t it be easier with one?
In addition to helping you create appropriate strategies for your business, a winning plan can help sell your ideas to customers (especially if you are pursuing a business that goes after large contracts) and employees as well. Think creatively and use your plan as a serious marketing tool.
A truly effective business plan should build ownership in key players. Don’t just write the plan on your own and stick it in a drawer. Involve significant others (partners, managers, family) wherever and whenever you can because many of them will play key roles in making your dream a reality. Keep employees and partners involved in the planning, preparation and use of your business plan. Encourage those who will be most impacted by the plan to take an interest in the continuing and evolving life of the plan.
Investors and lenders aren’t out there giving away money with no thought. (If they are, please call me!) Potential funders (loan committees, family, friends, venture capitalists, stockholders) will need to evaluate your business in order to make a decision as to whether or not your business is a safe risk. Your business plan is the document that gives them information they need in order to accurately make an evaluation. It is your chance to sell others on your business idea and strategy. Use your plan to get investors and lenders on board and then continue to use it to lead your business.
It should be noted that when you use your business plan to raise money all the federal and state securities laws must be followed. Typically, a private placement memorandum (or “PPM”) is prepared by a securities attorney. The PPM contains all the risks an investor must be aware of and a subscription agreement for shares whereby the investor indicates he is aware of all the risks. The business plan is incorporated into the PPM so the investor has an understanding of where the company is headed. While a complete discussion of the securities laws is beyond the scope of this book and we recommend that you seek qualified legal counsel and financial advice. We shall also review this issue again in Chapter 10.
Keep in mind that different potential funding entities have different interests when it comes to business investment and they will be making an immediate initial decision as to whether or not you capture their interest. You have maybe ten minutes to get a funder’s interest and instill in him or her a sense of confidence in your ability to pay back or increase his or her investment. Most entities will be looking for an interesting idea, virtually guaranteed cash flow and the business acumen to bring it all together.
Your first chance to wow your audience is with your executive summary. It’s your first impression, so it has to be powerful. It has to be captivating and promising. It lets the reader know that you have a well thought out, winning idea for a business, product, service and/or market niche and the team and systems capabilities to fully capitalize on it. If the executive summary does not deliver, the rest of the plan will not be read.
After the executive summary, potential funders may look to the numbers to see if your ideas can generate the kind of revenues they are looking for. Potential investors and lenders often look first to your income projections and then to the balance sheet and income statement to see if those projections are realistic. Non-equity funders (the kind that are not looking to share in a piece of the business) will look to your forecasts to see if and how you will be able to repay loans. Equity funders (the kind that want some ownership in your business) will also be looking for evidence of a market. But don’t think you can simply state that there is a market for your business. Don’t
